Franchising, a way of doing business that has come to dominate the American retail landscape, is on trial. And the outcome could affect some of the country's biggest employers, business owners and tens of millions of workers.
In a case currently before the National Labor Relations Board, an administrative law judge will rule whether McDonald's Corp. (MCD) is a joint-employer of the tens of thousands of workers employed by the company's franchisees. Such a determination could make the fast-food giant, the largest restaurant chain in the world, culpable for alleged violations of labor law at some of its franchised outlets.
The ruling also could raise pressure on McDonald's to boost wages and accept more responsibility for working conditions at franchisees. In addition, it could give firepower to unions and other other labor groups pressing for change in the restaurant, health care and other industries where franchising is common.
The direction the labor board appears to be headed in could "undermine the entire franchise concept," said Samuel Estreicher, a professor at the New York University School of law and director of its Center for Labor and Employment Law. "From the point of view of a small businessperson, if he or she can get the right franchise and right location, this is a special opportunity for trying to run a business of their own."
"The NLRB is applying a new legal standard that would undermine a successful American business model that has enabled thousands of families to operate their own small businesses and help support millions of American jobs," McDonald's Corp. asserted in an emailed statement.
The issues involved in the hearing are "a big deal in the sense that we have seen over the years... where franchising, the use of temporary workers, and in some cases contracting out certain activities, where one powerful entity has control over the process, pushing off risk and pushing off liability," said Ken Jacobs, chair of the UC Berkeley Labor Center. "This has important implications for unions and organizing."
A key issue in the case, and for other big chains, is the degree to which franchisors like McDonald's exert control over franchisees' business. McDonald's sets out in detail how franchised restaurants must prepare its food, for example, as well as specifies many of the businesses' methods, procedures and standards. That helps ensure that a Big Mac tastes like a Big Mac in every McDonald's restaurant, an essential aspect of the company's brand and reputation.
"In the fast-food industry, return business is based partly on the customer's belief that the experience will be the same in any outlet of the company visited," wrote David Weil, Administrator of the Wage and Hour Division at the U.S. Department of Labor and an economist at Boston University, in "The Fissured Workplace," a 2014 book that look at how the U.S. workplace is changing.
In opening statements on Thursday in Manhattan, the NLRB said McDonald's uses management consultants, a sophisticated computer system and a sweeping operating manual to oversee conditions of those employed at its franchisees, according to Law360, a legal news service.
McDonald's refutes the notion that it is a joint-employer with franchisees. "We do not direct or co-determine the hiring, assignment wages, hours, or any other essential terms and conditions of employment of our franchisees' employees," the company stated.
McDonald's in April raised hourly wages for the 90,000 workers at the 1,500 company-owned outlets to more than $10 by the end of this year. But the decision does not apply to the 750,000 workers employed at the roughly 12,500 McDonald's restaurants around the country.
"Franchising is just one common way that a big entity effectively contracts out running the show at the ground level," said Cynthia Estlund, a New York University School of Law professor. "There is nothing wrong with it, but the question is who has effective authority to set conditions of employment."
The case is rooted in a movement that expanded into nationwide protests in 2012, when the union-supported Fight for $15 campaign was first finding its footing. McDonald's workers joined thousands of retail and fast-food workers, along with labor activists, in conducting work stoppages to rally for improved pay and work conditions.
McDonald's has been a major target of worker protests and labor organization efforts, which target highly visible actors to garner public support, Estlund said. "It matters more to McDonald's Inc. what the public thinks than to a particular McDonald's franchisee."
Of 291 charges filed with the NLRB claiming McDonald's USA and certain franchisees had punished workers who took part in pro-labor activities, 86 were found to have merit, with 11 cases resolved and 71 still pending. The cases were consolidated with hearings also slated in Chicago and Las Angeles.
"It's wrong that the Golden Arches continues to foist responsibility for its alleged law-breaking onto its franchisees," NELP general counsel Catherine Ruckelshaus, said in a statement released ahead of the hearing. "McDonald's exerts substantial control over its franchised restaurants, so it's only right that the company should also be held responsible for the worker protections at its restaurants."
"You have a corporate entity with significant power over every aspect of operations over the franchisee, but the corporation is shielded from liability for what the franchisee may do in terms of labor practices in order to meet those strict terms," said Jacobs, who notes the the corporation's control also extends to pricing over some, although not all, items on McDonald's menu.
"You do see some variation in pricing in fast-food restaurants, but the latitude is very narrow in terms of what they can do with price, because McDonald's will say, 'Here's this set of items we're going to advertise nationally -- historically it was the $1 menu," Jacobs said. "That places a really strong set of limits on how much the franchisees can vary their prices on other items, so effectively McDonald's is largely controlling the prices."
Labor advocates also argue that the legally enshrined principle of collective bargaining isn't meaningful at the local franchise level if McDonald's Corp. is "micro-managing the details of how the work is done," said Estlund, a labor and employment law expert.
"The latitude around wages and scheduling are narrowed down quite considerably by the nature of how the franchise agreements and money is all set up," Jacobs said. "If you're in a bargaining situation, you want to bargain with the person with power."
The International Franchise Association defends the franchising business model, saying it is responsible for 9.1 million jobs and for hundreds of thousands of successful small businesses. The franchise sector accounts for roughly 3 percent of U.S. GDP, or more than $500 billion annually.
"Locally owned small businesses are hoping they won't be the next 'test case' by the NLRB as part of a larger strategy orchestrated by activists targeting the franchising business model in a single-minded attempt to grow their membership," IFA president and CEO Robert Cresanti said in an emailed statement.
But unions are leveling an attack at McDonald's and other franchisors, rather than devote resources to organize employees in individual stores, Estreicher said. "This is what I call a Latin American style of union organizing, getting the government to pressure the brand to help you organize people top-down."
Estreicher believes the NLRB will ultimately rule against McDonald's and expand the legal definition of joint employer, but also that its decision would ultimately be overruled in court.
The NLRB ruling will have difficulty in court because "they can't prove that McDonald's got involved at a level determining the franchise store employees' hours and wages," he said. "McDonald's doesn't tell [its franchisees] whom to hire, what to pay and whether to fire or promote" workers.
McDonald's is already looking beyond the NLRB's decision, saying in its statement: "This is just the first step in what is likely to be a long process, and despite what happens at the NLRB's own hearing, McDonald's USA will continue the fight through the administrative process and eventually into a court of law where we feel confident we will then have a fair process and will ultimately prevail."